The Trump Administration Wants Banks Back In The Mortgage Business. Banks Have Other Ideas.

The Trump administration and the Federal Reserve want banks to get back into the mortgage business, as part of their efforts to make homes more affordable.

Banks, though, aren’t likely to go along.

Regulators are hoping that pushing mortgage origination back to banks and away from less-regulated lenders will unlock more loans for homebuyers, give federal agencies more insight into risks brewing in the housing market and boost revenue for regulated financial institutions.

In the wake of the 2008 financial crisis, the federal government imposed rules requiring banks to hold more capital on their balance sheets to withstand another housing meltdown. Those rules raised the cost of mortgage lending for banks, leading many to scale back the business. Now, under President Donald Trump, regulators are rolling back some of those rules to make lending more attractive to banks.

“Regulation by reflex has driven excessive regulation,” Treasury Secretary Scott Bessent said in February. “That can lead to economic stagnation.”

But banks aren’t likely to rush back into the mortgage business, analysts say. Many banks see mortgage lending as a less profitable line of business, one that could haunt their reputations and incur huge legal costs should the housing market collapse as it did during the 2008 global financial crisis.

Morgan Stanley analysts said in a research note that “large penalties post-2008, a focus on relationship banking with core customers, and higher cost structures [compared with] digital-first nonbank models” played a role in banks backing away from mortgage lending.

That means the benefits of the administration's broader bank deregulation will likely not flow through to the housing market, as the administration gears up for a challenging midterm campaign in which affordability concerns — particularly in housing — are top of mind for many voters.

“Don’t expect an aggressive pivot by banks,” Morgan Stanley’s analysts wrote.

Banks issued most of the country’s mortgage loans before the crisis. But tighter regulations and the political fallout of the housing collapse in the aftermath sent them heading for the door, yielding their dominance in the mortgage market to lenders such as Rocket Mortgage or United Wholesale Mortgage.

Today, these types of lenders issue around two-thirds of all home loans, according to data from the Financial Stability Oversight Council, an interagency panel of regulators.

Last month, the Federal Reserve and other regulatory agencies announced plans to lower the amount of capital that banks will need to hold against the mortgages on their balance sheet and allow banks to hold more mortgage servicing assets — all to make it cheaper for banks to lend to homebuyers. The proposal estimates that the mortgage provisions along with other changes to bank capital rules could unlock $643 billion more in lending capacity, which, if lent to the real estate market, could push down loan prices.

Still, regulators do not expect the changes to be a panacea. Bank capital “represents only a small part of the broader mortgage problem,” said Federal Reserve Vice Chair for Supervision Michelle Bowman, who initially raised the proposed changes. “Comprehensively addressing mortgage market challenges would also require revisiting Consumer Financial Protection Bureau rules and legislative requirements.”

The proposals will have limited effect on mortgage lending, said Bob Broeksmit, president of the Mortgage Bankers Association, a trade group representing the real estate finance industry.

“I don't expect that there's going to be a sea change in who does mortgages,” he said. Broeksmit and the MBA still praised the changes, calling the previous requirements overly burdensome.

According to one official at a larger bank, granted anonymity to discuss matters freely, banks are unlikely to reenter a space they have already exited unless the incentives meaningfully change. The changes from this package, while helpful, do not make that much of a dent, the official said.

The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Fed have taken steps to lower the cost burdens of supervision, including by slimming supervisory staff and refocusing oversight on just “core” financial risks. They’ve also moved to allow regulated financial institutions to take on more leverage, with the aim of making banks more competitive with their less regulated counterparts.

Bank of America, JPMorgan Chase, Citi and Wells Fargo declined to comment on their mortgage origination plans and their thoughts on the recent capital changes. The Federal Reserve declined to comment.

“The Trump Administration will never stop working to streamline regulations and expand housing affordability for all Americans,” said White House spokesperson Davis Ingle.

In the years since the crisis, nonbank lenders have come to play an important role in the mortgage industry. Some of the firms have existed for decades, and, according to Walt Schmidt, senior vice president and manager of mortgage strategies at FHN Financial, they have a number of “competitive advantages” compared with banks that make them reliable issuers. Banks have recognized this and actively lend to the big mortgage lenders.

But nonbank lenders are potentially more vulnerable to risks, according to regulators, who would like traditional banks to serve a more important role in economic growth and broaden their lending.

“Perhaps the greatest risk [nonbank mortgage lenders] present is that the regulatory and resolution frameworks for these mortgage companies have not kept pace with their growth. When a large bank servicer fails, regulators have tools to ensure core servicing functions continue — requiring that borrower mortgage payments are credited correctly and that borrowers in financial distress receive appropriate modifications. Nonbank servicers are subject to far fewer safeguards,” said Bowman.

Banks now originate 35 percent of mortgage loans and hold the rights to servicing 45 percent of mortgages, according to Bowman — down from 60 percent and 95 percent, respectively, in 2008. Rick Palacios at the real estate advising firm John Burns Research and Consulting said nonbank lenders make up most of the rest.

“The percentage of mortgage origination that was coming from the banks versus the non-banks totally 180-ed,” he said. “The pendulum probably swung a little too far after 2008, but that is always what happens.”

Advocates for small nonbank lenders say they don’t see the Federal Reserve’s proposed changes as a threat to their market share.

Rob Zimmer, a spokesperson for Community Home Lenders of America, told POLITICO his organization “is fine with these bank capital changes.”

The industry group, which represents small lenders focused mostly on mortgage origination, “is skeptical” it was the post-crisis capital requirements that led nonbank lenders to take over the market, Zimmer said in a statement.

Schmidt, of FHN Financial, said he doesn’t see traditional banks “coming back wholesale.”

“But I do believe that they're more likely now to hold on to servicing rights and originate loans. The changes make it a little easier for them to do that,” he said.